When you apply for a mortgage, your lender will request a great deal of paperwork from you. This will include looking at your income, assets and existing debt - as well as your credit-worthiness.
As a part of the mortgage loan process, the mortgage lender, along with the underwriter of the loan, will request verification of the assets and income that you say that you have.
As a part of the verification process, certain terms and questions may arise. Here are a few:
What Mortgage Products Are There?
Here are a few resources to explain the different mortgage products available to homebuyers.
Are you looking to buy a home here in Nashville with little or no money down? There are 2 loans that allow people to borrow 100% of the purchase price, VA and USDA Rural. Unfortunately, these loans are only available to a select few as you must be a veteran of the armed services or your property must be in an outlying area deemed rural by USDA. In Tennessee, however, the is another option available for cash-strapped individuals.
THDA Grant Money
The Tennessee Housing and Development Agency (THDA) offers grant money assistance to first time homebuyers and buyers who have not owned a home (or lived in a home owned) for the last 3 years. There are actually counties that are exempt from the 3 year requirement. THDA has 3 different loans scenarios to choose from. The Great Rate (which is currently at 4.6% but offers no grant assistance), the Great Advantage (currently 4.9% offering 2% grant money assistance) and the Great Start (currently 5.2% offering 4% grant money assistance).
The THDA loan is actually an FHA loan requiring 3.5% in down payment, however, THDA serves as the non-profit organization approved by FHA to assist with down payment and closing costs. For more information, go to www.thda.org.
How to Get Prequalified for a Mortgage
Your mortgage specialist will need for you to fill out an application and check your three credit scores. Once you have qualified by your scores, your income will need to be determined to verify how much of a loan you can qualify for. Credit score requirements constantly change but for the most part you will need a 640 middle score to qualify.
The Difference Between Mortgage Preapproval and Prequalification
Preapproved and prequalified are two words that can be very confusing for home buyers. A majority of home buyers consider preapproval and prequalified to be the same. Even worse, some agents use these terms simultaneously, which can confuse home buyers further.
When a home buyer is prequalified, this means that they are approved by the creditor to obtain a loan. For this to occur, typically, the creditor will talk to the home buyer, and decide that they are eligible for a loan.
At this step, the creditor has yet to confirm the home buyers credit report. It is only going off what the home buyer has told them. This is not the case with all creditors, but most only ask a series of questions to deem a home buyer prequalified. At this stage, the creditor may have not even met or reviewed a loan application with the home buyer.
When a home buyer has been presented a preapproval letter by a creditor, it is confirmed that the creditor has checked their credit report and submitted a loan application. The creditor could go as far as sending the buyers information through a computer-generated approval process. This is known as desktop underwriting or a DU.
Only an underwriter is authorized to grant a loan. Until this is done, preapproval is not truly complete. The underwriter completes this step during the last part of a loan. When the buyer receives their preapproval letter, it will typically state that this decision is pending until appraisal, title reports, subject property conditions and final underwriting are complete.
Understanding the difference between prequalification and preapproval is one of the most important steps towards owning your home. Make sure you know whether you are prequalified or preapproved before you start home shopping.
The Ability to Pay Rule
Subprime mortgages accounted for a significant proportion of the recent housing crisis in the Nashville area and around the country. During the housing boom, many people who could not realistically afford specific mortgages were approved for them anyway. The federal government passed legislation in 2013, often referred to as the "Ability to Pay Rule" to help prevent a housing crisis from happening again.
This legislation, under the Truth in Lending Act, requires underwriters to look at eight factors when determining your ability to make particular payments:
- Your current or expected income
- Your current employment status
- Your expected monthly mortgage payment
- Your monthly payment for a second mortgage on the same property (if there is one)
- The monthly payments for insurance, property taxes and homeowners association dues
- Your debts and any alimony and child support
- Your monthly debt-to-income ratio, and
- Your credit history
Your mortgage lender may use other factors to look at your credit-worthiness as well, but lenders typically look at these eight items, which define the "Ability to Pay" rule.
How Much House Can I Afford?
All underwriters have debt-to-income ratio guidelines they must go by. Debt includes mortgage note and all other payments that appear on your credit report. As a general rule you are allowed 45 to 50% of your gross income to qualify with. While you may go up to that percentage this doesn't mean you will want that note that comes with it.
Set a comfortable monthly note and stick with it. Don't become house poor.
What Information Will The Mortgage Lender Request?
The mortgage lender uses varying sources to more closely examine and verify the eight factors above that make up the Ability to Pay Rule. As a general rule, when you're looking to purchase a home in a Nashville community such as Gallatin and apply for a mortgage loan, you will be asked to provide the following documents:
- W-2 forms from the past two years
- If self employed, form 1099's and profit and loss statements for your business or self-employment income
- Borrowers paycheck stubs from the past month
- Bank statements (with information about any unusual or large deposits)
- Tax returns from the previous two years
- Evidence of all debts, including student loans, credit cards and child support
- Balances and minimum payments on all debt obligations
- Proof of rent or mortgage payments (through bank statements or canceled checks)
The mortgage lenders may also request you to sign a form allowing them to access your tax returns directly from the Internal Revenue Service (IRS).
How Does a Borrower Prove Work History if Changing Jobs?
Most borrowers prove current employment with recent paystubs. However, this is not particularly useful for borrowers that are moving or switching jobs. In this case, the lender may give you what is known as an "Offer Letter Mortgage". This means that you can use your new job offer as a proof of employment and a way to establish your future income as well. However, be sure and get a solid job offer letter. Lenders may not accept a letter or email stating the new job may or may not be available or be available at sometime in the future.
Proving future income from a job offer letter is particularly important for people who might be receiving large increases in income from a promotion or new employment - or for recent college graduates that may not have been working while in college. Borrowers can also use a notification of future if you get a raise or promotion from your current job and you would like the future income figured into your debt-to-income ratio.
What Paperwork is Needed for Self-Employed Borrowers?
There's a lot of information you'll need to present to your lender. Keeping everything organized will save you time and headaches as you move forward!
Fortunately, paperwork requirements for self-employed borrowers have loosened recently, with new guidelines from Fannie Mae. In the past, mortgage lenders may have required two years of self-employment income, with profit and loss statements. As of this year, many lenders may only request one year, which allows new business owners to apply for a loan sooner.
Does a Mortgage Loan Require Reserve Assets?
For many reasons, mortgage lenders may require verification that you have certain assets readily available to make the down payment, closing costs and other relevant expenses at the time of closing. The term "assets in reserve" refers to liquid assets (or assets that could be readily accessible at virtually any time) that are in your possession. Your lender may ask for a greater reserve of assets if you have a weak employment history or if your credit is a little lower than preferred.
Additionally the mortgage lender may request that you have the asset reserves or cash-on-hand available to make the minimum monthly payments for 3-12 months after closing, depending on the terms of the specific offer. For this calculation, each month's mortgage payment is the sum of required payments for principal, interest, taxes and insurance. This reserve is intended to act as a protection for your mortgage, in the event that your earning potential is cut short due to job loss or disability.
How Much Down Payment Must I Have?
There are certain loan types that will not require a down payment or you may qualify for down payment assistance
through grants. These are usually reserved for lower income families. FHA requires as little as 3.5% and conventional
loans can require as little as 5% if you credit score qualify.
What Is Mortgage Insurance?
If you borrow more than 80% of loan to value (contract price on purchases and appraised value on refinances), most lenders will require this insurance. Mortgage insurance is a policy that insures the lender against any losses on the property due to foreclosure. If you are below 80%, the lender views this as a lower risk so that if they foreclose, there is enough room to resale without taking a loss.
What Assets Are Verified?
A borrowers assets are not always just limited to the cash in a bank or savings account. If you already own a home and are in the process of selling, often times the lender will allow you to use a seller's net sheet that will show the expected cash at closing from the home sale. Other forms of assets count as a reserve, such as:
- Retirement funds from a 401k or independent retirement account (IRA)
- Stocks or mutual funds
- Money held in savings
- Gifts from immediate relatives
During the mortgage application process, you will provide recent bank statements, usually from the past 3-6 months. You will typically be expected to document and explain any large deposits that are not proven by a pay stub or business income.
It is not uncommon for some borrowers to receive a gift from a relative to help pay the down payment or closing costs. However, your lender may request that the giver sign a document verifying that they gave the gift freely and do not expect it to be repaid.
How Do I Calculate My Monthly Payment?
There are several online mortgage calculators available. They are easy to use and will help you get the principal and interest payment (P & I). Don't forget that there is more to the payment than P & I. You must calculate property
taxes and home owner's insurance and in some cases you may also have Mortgage Insurance (MI or PMI).
What is a Stated Income or Stated Assets Loan?
Since lenders are required to look at income during the underwriting process and typically will also look at assets, you may wonder about the purpose of loans that do not ask to prove income or assets. These types of mortgage loans have greatly decerased since the housing crisis and are not offered by many mortgage lenders. However, should they be available, these loans can be useful for people who are self-employed, with an inconsistent monthly income but a stable yearly income. Lenders who offer these loans usually require that applicants make a larger down payment and provide greater-than-usual documentation of their ability to pay the monthly payments.
How Long Will It Take To Close My Loan?
By law you cannot close until 7 days after making application in person and 10 days after making application by phone or internet. You should allow 3 to 4 weeks at a minimum.
Where Do I Start?
Ask around and then check online. Friends that have purchased or refinanced before can give you great insight.
There are also lots of resources online that show feedback. If you are working with a Real Estate professional, seek their counsel also.
The underwriting process for your mortgage loan is a crucial step to determine if a mortgage borrower can afford the mortgage as offered. The information you provide to your lender as part of your application helps to ensure that you are a worthy borrower who will make the payments on time every month.
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